Why is the European Central Bank dead set against even a "voluntary" restructuring of Greek debt that would force private investors to take a bit of a haircut on their holdings of Greek bonds? Matt Steinglass thinks their motivations are pretty much what they say they are:

The ECB doesn't believe it's possible to make private holders of Greek debt "share the pain" without precipitating a Greek default. They think if you pressure banks to roll over Greek debt, that debt will become untradeable, which is the same as "worthless"; the ratings agencies will deem the failure to pay at maturity to be a technical default, which may trigger credit default swaps; the Greek banking system will become insolvent, meaning nobody in Greece will have any money anymore; recapitalising those Greek banks will have to be done by governments that actually have money, ie the northern European ones; and ultimately the costs will all fall on the northern European taxpayer anyway. Meanwhile northern Europe's pension funds will be hit by the credit panic, which again will hurt the average citizen. The ECB folks sincerely think there's no way around having taxpayers pick up the bill for saving Greece and the euro.

I would really like to see a more detailed explanation of this. The basic idea here is that credit default swaps are (duh) triggered by a default: when you buy CDS on, say, a Greek bond, you're paying for protection against default. If the issuer of the bond defaults, then you're made whole by whoever you bought the CDS insurance from.

So far, so simple. It's often a little unclear exactly what triggers payment of a CDS, but it's perfectly plausible that even a modest restructuring, whether voluntary or not, would count as an "event" that would trigger lots of CDS contracts. But then what? What are the figures here? Just how much CDS is there on Greek debt? How much would be triggered by default? Who are the main sellers of CDS on Greek bonds? How big would the effect be if they had to pay off bondholders?

I'm curious about this for two reasons. First, I want to know if the ECB really has a good case. Would Greek default trigger a massive wave of renewed insolvency all over Europe as CDS sellers are forced to pay off on their insurance? Second, I want to know if this is yet another reason we should be wary of CDS. One of the big knocks against CDS has been that although it's theoretically a perfectly fine idea, in practice it can act as a huge multiplier, turning a bad default that hurts thousands of people into a catastrophic, systemic payout that hurts millions. In this case, it would turn tens of billions of dollars of Greek default (bad) into hundreds of billions of dollars of rolling CDS payouts (really, really bad).

But is this really the case? If this is what the ECB thinks, I'd like to see the detailed research to back it up. And if they're right, I think it's one more nail in the coffin of credit default swaps in general. If they really do magnify risk this way, it's time to do away with them. If you buy Greek bonds — or anyone else's bonds — maybe it's time to start doing due diligence again instead of just buying CDS and calling it a day.

UPDATE: Felix Salmon has a few numbers here that suggest CDS exposure is fairly small. However, his numbers also suggest that direct exposure to Greek default is fairly small, and in any case, not a problem for the banking industry. So this is still a bit of a mystery.

David Brooks has a scathing column about Fannie Mae today, based largely on Reckless Endangerment, a new book by Gretchen Morgenson and Joshua Rosner. A few excerpts:

Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus....Fannie ginned up Astroturf lobbying campaigns....Fannie lavished campaign contributions on members of Congress....Fannie executives ginned up academic studies. They created a foundation that spent tens of millions in advertising. They spent enormous amounts of time and money capturing the regulators who were supposed to police them.

Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.

I think this is basically right, and Fannie deserves most of the grief that it's gotten. But it doesn't deserve the paragraph that follows:

Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next.

It's absolutely legitimate to be mad as hell at what Fannie did. It's not legitimate, though, to pretend that Fannie was really a motivating force behind the financial crash. The evidence is pretty clear on this point: although Fannie (and Freddie Mac) expanded their share of the mortgage securitization market dramatically in the 80s and 90s, their market share plummetedjust as dramatically at exactly the time when the housing bubble really started to take off in 2002. It was mostly the private sector that drove the declining standards in home loans during the bubble, with Fannie and Freddie playing catchup only years later after they had lost a big chunk of market share. That was a bad move on their part, and by coming in late they ended up saddling themselves with the very worst quality loans from the 2005-06 era. These collapsed almost entirely, requiring a massive taxpayer bailout.

This is important. Fannie and Freddie screwed up badly during the tail end of the housing bubble, and they certainly played a general role in promoting home ownership for many years before that — a role that was pretty enthusiastically endorsed by everyone else in Washington too, both Democrat and Republican. They shouldn't be let off the hook for that. But did they drive the housing bubble? No. Wall Street is desperate for confirmation that they weren't really to blame for the collapse in underwriting standards and the securitization mania that followed in the early aughts, but they shouldn't be allowed to get away with this no matter how many conservative think tanks are in the bag for them. Whether you love government agencies or hate them, the evidence is clear: The bubble-induced financial collapse of 2008 was mostly the fault of the private sector, which went almost literally insane with its financial engineering and tacit endorsement of mortgage fraud from 2000 through 2006. Like it or not, 'twas Wall Street that killed the beast.

UPDATE:Jonathan Bernstein: "David Brooks today singles out Barney Frank. The same Barney Frank whose Democrats were the minority party in the House from 1995 through 2006. Hey, for all I know Frank was incredibly evil during those years (I haven’t read the book Brooks is working from), but it just couldn’t have mattered very much, at least in the twelve years leading up to the crisis."

Dean Baker: "There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers."

If you want to be cynical about the way all this works, here's how to be cynical about it. Right-leaning think tanks and advocacy groups constantly tell the folks on their huge direct-mail lists—older people, mostly—that America, the greatest country in the history of the multiverse, is going to hell in a hand-basket, and quick, unless! Unless you dig deep and send cheques to the Americans for a More American America Foundation or ProsperityWorks or whatever.

Then, the boards of these organisations reward their friends in management and fundraising with handsome salaries (just think what they're forgoing in the private-sector!) and spend the rest of the money on programmes that may or may not have a clear relationship to the institution's mission. Right-leaning think tanks and advocacy groups are to a significant extent transmission belts conveying the cash of fearful, constitution-loving widows into the bank accounts of "movement" professionals in Washington, DC. The first-order distributive consequences of these pay-for-play radio deals has to do with which Washington institution gets to tap which audience's potential donor pool.

Will says he isn't sure if lefty think tanks work the same way, and I'm not sure either. Certainly they appeal to fear in some of the same ways (conservatives will take away your reproductive rights, conservatives want to wreck Medicare, etc.), but I don't think the appeals to inchoate fear are quite as insidious as they are on the right, and I'm also pretty sure that being part of a lefty think tank isn't quite as lucrative at it is on the right. But I could be wrong! Still, if things were really the same on the left, then CAP and EPI and other America-hating socialist idea mongers would have their own deals with Rachel Maddow and Keith Olbermann. But they don't.

Anyway, this is your lesson for the day, I guess. Be cynical if you want, but be cynical about the right things. Noted.

AARP, the powerful lobbying group for older Americans, is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington's debate over how to revamp the nation's entitlement programs.

...."The ship was sailing. I wanted to be at the wheel when that happens," said John Rother, AARP's long-time policy chief and a prime mover behind its change of heart.

....There are limits to how far AARP is willing to go. The group will accept cuts, but won't champion them, and it is particularly leery of certain concepts such as eliminating benefits for wealthier recipients....It wants tax increases to fill most of the program's financial hole, and it insists that a deal must be crafted apart from broader deficit-reduction negotiations.

Unlike most liberals, I welcome this. I continue to think, as I have for a long time, that (a) Social Security ought to be put on a firmer financial footing, (b) this can be done with a very modest package of tax increases and benefit cuts, and (c) this would satisfy centrist critics like the Peterson foundation and the Washington Post, and without their help the ideologues who want to destroy Social Security would have no ground to stand on. They'd keep yelping, but no one would pay any attention to them.

A deal that increased revenue by about 1% of GDP and cut benefits by 0.5% of GDP, phased in from 2020 through 2040, could be done without adopting terrible ideas like an increase in the retirement age and would be practically painless for everyone involved. It would take Social Security off the table for a long, long time, and that's well worth doing. Right now I don't think you can get Republican support for a plan like this, and it's not as if there's any big crisis here that has to be solved immediately. But if a deal like this does become possible someday, liberals would be smart to take it.

Or, more precisely, psilocybin, the active ingredient in magic mushrooms. Here's the boring news first: ingesting psilocybin produces a mystical experience that can be quantified. "Noetic quality," for example, increased from 19.4 on a placebo to 70.6 on the highest dose used in the study. "Transcendence of space and time" increased from 18.3 to 78.2. Etc. You probably already knew that.

Here's the somewhat more interesting news: psilocybin can sometimes produce bad trips full of fear and anxiety, but the researchers have also figured out how to minimize this. Partly this was due to the experimental design: "The study was designed to optimize the potential for positively valued experiences by providing 8 hours of preparation, administering psilocybin in a pleasant, supportive setting, and instructing volunteers to focus explicitly on their subjective or inner experience." They used soothing music, too. But they also tried various dosages of psilocybin on their subjects, and it turns out that nearly all of the episodes of anxiety happened at the highest dose. Crank it down one notch and you're still likely to get most of the benefits but with significantly less chance of a bad experience.

But now for the most interesting result: psilocybin produces not only mystical experiences, but joy, happiness, and positive social effects. And it does it for a long time: in followup interviews 14 months after the study was completed, nearly all the subjects still reported positive changes in their lives, especially if they received their psilocybin in increasing dosages. (Half the study volunteers got the highest dose first and worked down, and half started with the lowest does and worked up. All volunteers also got a placebo tossed in at some point.) Here are the geeky charts you've been waiting for:

These effects were confirmed by interviews with friends of the volunteers who had been recruited to provide periodic feedback to the research team.

Notably, 61% of volunteers considered the psilocybin experience during either or both the [highest dosage] sessions to have been the single most spiritually significant of their lives, with 83% rating it in their top five. Consistent with this, 94% and 89% of volunteers, respectively, indicated that the experiences on those same sessions increased their well-being or life satisfaction and positively changed their behavior at least moderately.

....One month after sessions at either or both the two highest dose sessions, 94% of volunteers endorsed that the experience increased their sense of well-being or life satisfaction moderately or very much, and 89% rated moderate or higher changes in positive behavior. At the 14-month follow-up, these ratings remained high. The types of behavior change most frequently cited by volunteers were better social relationships with family and others, increased physical and psychological self-care, and increased spiritual practice (Table 6). Ratings by community observers before and after the study as well as ratings by study monitors after the study were consistent with the persisting positive changes in behavior and attitudes claimed by the volunteers.

So there you have it: a genuine mystical experience with long-lasting positive effects, no reported negative effects, no known medical side effects in healthy people, and with virtually no chance of a bad experience. Does that sound like something you'd like to try? Well, you can't: no matter how safe and beneficial it might be, psilocybin is a Schedule 1 controlled substance and you can't have any. You may thank the War on Drugs whenever you like.

For a taste of what the volunteers said about their psilocybin experiences, keep reading. A selection of comments from the Hopkins study is below.

In the presence of team owner Carl Pohlad and former Twins greats such as Harmon Killebrew and Kent Hrbek, Pawlenty took a seat at an infield table and signed into law a bill authorizing construction of a $522 million outdoor stadium in downtown Minneapolis.... Though the Twins agreed to pay approximately one-third of the cost, the rest of the bill was to be footed by a 0.15 percent sales tax hike in Hennepin County — a relatively small encumbrance on the state’s largest county, but an increased tax burden nonetheless. The bill was controversial, since the state legislature and Pawlenty took advantage of a 1997 law to grant the county board permission to enact the new tax without a voter referendum.

Nobody is going to care about this. But they should! It's one thing to be a rabid anti-tax conservative, but it's quite another to be a rabid anti-tax conservative who makes an exception for the worst possible tax increase on the planet. If you can come up with any poorer excuse for a tax hike than yet another subsidy for a millionaire billionaire sports team owner, I'd like to hear it. In fact —

Oh wait. A millionaire billionaire sports team owner and a regressive sales tax increase. Now I get it. Sorry for the momentary lapse.

UPDATE: Turns out Pohlad is actually a billionaire, not just some scruffy millionaire. Thanks to Ryan in comments for pointing this out.

What's more disturbing, however, and uncommented until now, was the total lack of support for freer trade among the GOP field....All of the candidates focused like sharks with frikkin' laser beams attached to them on the economy. The standard GOP litany of solutions for jump-starting the economy were offered: tax cuts, cutting regulation, tax cuts, cutting government spending, tax cuts, reigning in the Fed, tax cuts, ending Obamacare, tax cuts. Not one of the candidates, however, mentioned trade liberalization as part of their fornmula for getting America moving again.

To be fair, this isn't as bad as when Obama and Clinton were debating over who would eviscerate NAFTA faster in 2008 (and funny, isn't it, how that never happened). And it's not like I was a huge fan of Obama's trade policy. To be just as fair, however, at least the current president completed KORUS negotiations and signaled strong interest in the Trans-Pacific Partnership. I get the sense that no one in the GOP field is going to stick their neck out on international trade or investment. For the party that claims to be in favor of lower taxes and regulation, this is a travesty.

Dan continues to be worried. I continue to yawn. Why? Partly because of that first bolded statement: when Barack Obama and Hillary Clinton were pandering to anti-NAFTA sentiment before the Ohio primary in 2008, it was obvious even at the time that they weren't serious about it. As I said at the time, "The fact that Obama and Clinton jacked up the anti-NAFTA rhetoric just in time for the Ohio primary and will almost certainly abandon it on Wednesday is all the evidence I think we need." It was, namely, evidence that this was just political posturing and neither one of them was really anti-trade.

For the same reason, I don't take seriously the lack of trade boosterism among the Republican candidates this year. Are they going to stick their necks out in favor of trade agreements when the economy is still in shock and registered voters everywhere are worried about their jobs being offshored? Of course not. They aren't suicidal, after all. Frankly, I'm surprised that Senate Republicans are even going so far as to use pending trade deals with South Korea, Colombia, and Panama as hostages for some of Obama's executive branch nominees. That's more support than I would have expected.

If you're a trade liberalization fan, there's not much to be happy about right now. But let's be honest: during a massive economic downturn that features epic levels of unemployment, mere lack of progress isn't bad. Of course no progress is likely to be made right now. But the fact that no serious ground has been lost either just goes to show how permanently free trade has become the default position of virtually everyone on both the left and the right. When the economy picks up, support for trade liberalization will pick up right alongside it.

The dollar value of the benefits of the major rules finalized or proposed by the EPA so far during the Obama administration exceeds the rules’ costs by an exceptionally wide margin. Health benefits in terms of lives saved and illnesses avoided will be enormous. Expressed in 2010 dollars:

The combined annual benefits from all final rules exceed their costs by $32 billion to $142 billion a year. The benefit/cost ratio ranges from 4-to-1 to 22-to-1.

The combined annual benefit s from four proposed rules examined here exceed their costs by $160 billion to $440 billion a year. The benefit/cost ratio ranges from 12-to-1 to 32-to-1.

OK, fine: the rules will save lives and improve our health. But at what cost in the tidal wave of jobs lost just to get a bit of mercury and soot out of the air? EPI's Josh Bivens runs the numbers for one of EPA's biggest initiatives, the "air toxics" rule. Here's the final tabulation:

So there are job losses in some sectors and job gains in others. The middle estimate for the aggregate effect is +61,000 jobs. When you account for spending multipliers, the aggregate effect is somewhere between 77,000 and 166,000 jobs.

If you want to, you can still object to these rules. Maybe you can argue that they're distortionary in some way, or that there are cheaper ways of getting the same results. Maybe. But even if the rules aren't perfect, their benefits far exceed their costs and they actually produce additional jobs for the economy. Dave sums things up:

Conservatives are hiding behind abstractions — job-killing big-government blah-blah — but don't be fooled. They are not protecting "the economy" or "jobs." They are protecting a specific set of polluting industries, at the expense of the public interest. Put that horsesh*t in any ideological serving dish you want. It still stinks.

Maybe the rest of the economy is in the doldrums, but the LA Times reports that sales of U.S. military gear are on a record pace this year:

India signed a deal Wednesday for the purchase of 10 Boeing C-17 military cargo jets....The largest-ever U.S. foreign arms deal was announced last October, when Saudi Arabia ordered $60 billion in military hardware in a multiyear pact. The Saudis' laundry list of weaponry included Raytheon Co.'s 2,000-pound bunker-busting bombs, Boeing's F-15 fighter jets and Sikorsky Aircraft Corp.'s Black Hawk helicopters.

More deals are in the works. Australia wants two dozen Navy Seahawk helicopters valued at $1.6 billion. Saudi Arabia is eager to get $330 million in thermal-imaging and night-vision equipment. And Britain is looking to purchase $137 million in upgrades for its U.S.-made ship-mounted guns. Orders are also in from Morocco, Iraq and the United Arab Emirates.

Who says Obama isn't doing anything to boost the economy? And keep in mind, these are export dollars, so they're helping our trade deficit. Good job, military-industrial complex!